US low-cost carriers paint optimistic picture

US low-cost airlines are surprisingly upbeat as their larger, higher-cost brethren embark on yet another round of aircraft groundings and route cancellations. While they face the same rising fuel costs and stagnating economy, some low-cost carriers are showing signs of optimism.

This is in part because "capacity discipline is at the best level I've seen", says Rick Zeni, vice-president of revenue management at JetBlue Airways (pictured). And low-fares carriers are controlling their capacity in a different way to their network counterparts: they are stopping it before it gets into their system, cancelling aircraft deliveries as well as selling off aircraft. JetBlue, for instance, has deferred deliveries of 21 AirbusA320s, while AirTran has deferred delivery of 18 Boeing 737s.

Ben Baldanza, chief executive of Spirit Airlines (pictured left), says that even though the carrier is cash-positive on its routes to and from Latin America, Spirit will decide soon - probably in early July - if it will cut domestic routes. Baldanza says that some of its longer distance routes are likely candidates.

The carrier could ground as many as seven of its 35 A320-family aircraft. But, Baldanza says, it is "supremely focused" on cost controls, going so far as to have executives clean their own offices so that it can make a stronger case when it seeks cost cuts from its suppliers. He says: "If we can go to people and say that we are so low cost that we are taking out light bulbs, it makes it easier to ask them for a cut."

These carriers, speaking at the recent Low Cost Airlines World Americas conference in Florida, much like their larger counterparts, realise that "low RASM [unit revenue] is no longer a successful business model" and so are focused on raising revenues per seat, says AirTran director of revenue management Matt Klein.

For AirTran, this has meant a series of selective cuts away from low-yielding routes such as Las Vegas routes from smaller cities. It will make an opportunistic move into routes abandoned by larger carriers, moving into the Puerto Rico void left by American Airlines' planned pull down of capacity at its San Juan hub, with new service this winter from Baltimore/Washington International (BWI).

JetBlue, similarly, is adding service to San Juan as well as two smaller cities in Puerto Rico. But beyond these opportunistic moves, the sector plans almost no growth. As Klein explains, AirTran will be trimming capacity by as much as 5% late in the year "because you cannot grow the airline and grow revenue at the ame time". JetBlue actually plans negative growth in the fourth quarter, Zeni says.

Virgin America, which just began flying in August 2007, is also trimming by as much as 10%, planning "day of week" cutbacks so that it is not flying on Tuesdays or Wednesdays or other traditionally slow days, says its chief financial officer, Bob Dana.

Dana explains the Virgin concept, one that applies to pretty much all of the low-cost carriers: "We have adopted a strategy of co-existence. We want only a small portion of the market on any given route and our average market share is only 12%. But we will spend money where the 'guest' sees it. After all, if your only appeal is price, you are yourself subject to price competition." Virgin America has introduced fuel surcharges.

But most of these carriers are banking on another type of charge, the ancillary charge, for their revenue needs. Baldanza of Spirit talks of turning his South Florida-based carrier into a "platform for retail travel shopping". He says Spirit would rather charge more for a drink than raise the base fares, so it is looking wherever it can for travel-related services to sell.

JetBlue vice-president of network planning Marty St George says that the New York JFK-based airline is looking at revenue opportunities such as charging for more elaborate snacks or light meals but is "guarding the customer experience". It has just begun charging for feature films, although its trademark Live TV is still free of charge.

Roger Harris, the chief revenue officer of Minneapolis-based Sun Country Airlines, says that "so long as a low-cost carrier is transparent about it", there is room for ancillaries. But Harris warns that "legacies are putting their revenue premiums at risk" with their focus on ancillary revenues. "And they are also putting years of 'channel shift' at risk because customers can not be sure that they're getting the best price when so many ancillaries are out there, but they can't make a full cost comparison - and so they have to go to online travel agencies."